The S&P 500 has climbed 117% since its closing low on Oct. 12, 2022, with investment in artificial intelligence helping lift corporate profits and economic growth. On Oct. 9, the index traded near record highs, three days before the low’s fourth anniversary. The rally has coincided with a steep rise in large technology companies’ value and a greater concentration of the index in its biggest firms.
Who Captured the Gains
Nvidia’s market capitalization surged to $5.8 trillion from $286 billion on Oct. 12, 2022, making it the world’s largest company by market value. Its AI chips have made it a leading company of the current technological era. Thirteen U.S. companies now boast market values of at least $1 trillion, and all but two are in technology or have significant AI exposure.
The 10 largest companies make up about 40% of the S&P 500, compared with about 28% in October 2022, according to J.P. Morgan Asset Management. “It is a reflection of fundamental strength and earnings outperformance, but also it introduces some risks,” said Angelo Kourkafas, senior global investment strategist at Edward Jones. He warned that a reversal in the prevailing market theme could have an outsized effect on portfolios.
Only technology and communication services have outperformed the index during the bull run. Both sectors include megacap AI companies Alphabet and Meta Platforms. Oxford Economics estimates that AI accounts for about one-third of recent U.S. economic growth, including direct investment in AI infrastructure and the contribution of stock-market gains to consumer spending.
S&P 500 earnings are expected to rise more than 35% this year, as hyperscalers’ capital spending on data centers helps boost results. “You're seeing that AI theme show up in the economy and in corporate profits,” said Anthony Saglimbene, chief market strategist at Ameriprise.
Spending, Earnings and the State
Analysts expect S&P 500 earnings to climb about 31% year over year in the third quarter. Technology and AI-heavyweights Alphabet, Amazon.com and Meta Platforms are expected to account for two-thirds of that increase, according to Tajinder Dhillon, LSEG's head of earnings and equity research. Technology stocks helped push the index to a record high during the week before earnings season, which was expected to unofficially begin the following week with results from banks including JPMorgan Chase and Goldman Sachs.
LSEG data showed S&P 500 earnings grew nearly 54% year over year in the second quarter, the highest rate since 2021. Excluding mark-to-market gains at Alphabet and Amazon.com on AI-related investments, earnings growth came to about 35, still the highest since 2021. Semiconductor-company earnings are expected to have climbed about 136% in the third quarter, compared with about 158% in the second quarter, Dhillon said.
The Federal Reserve has pivoted to rate hikes as it tries to bring down high inflation. Tighter policy could slow the economy, perhaps severely, as higher Treasury yields compete with stocks. The 10-year Treasury yield stood around 5.2% after recently hitting its highest level in 24 years. Edward Jones remains overweight equities, Kourkafas said, but the firm’s recommendation is less aggressive as fixed income grows more attractive.
Pressure on the AI Bet
Energy earnings are expected to increase about 115% from a year earlier, while U.S. oil prices surged roughly 30% in the third quarter amid the ongoing U.S.-Israeli war with Iran. Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute, said consumer staples and real estate, which aren’t related to AI, had among the weakest third-quarter earnings growth estimates.
Investors are also asking whether massive investment in AI infrastructure will deliver the earnings companies expect. “A lot of this AI trade is built on continued capex spending, and every quarter we go, and they continue to spend, the hurdle rates get higher and the scrutiny gets larger,” Saglimbene said. He said investors were nearing peak earnings growth for the current cycle.
Nick Raich, CEO of the Earnings Scout, said momentum in earnings estimate revisions was starting to cool. “We're still going 100 miles an hour in the AI infrastructure buildout, but three months ago we were going 150 miles an hour.” Still, Raich said recent reports, including Micron Technology's, remained strong. Micron forecast quarterly revenue above estimates last month and said customers had raised commitments under long-term supply agreements to $32 billion.
Higher interest rates could also squeeze corporate profits, particularly for heavy borrowers such as utilities, Samana said. Markets could turn volatile ahead of next month's U.S. midterm elections, and weakness in AI could face sharp punishment.